Latvia Cuts the Income Tax by 2 Percentage Points
In yesterday's post, we presented a new paper arguing the merits of tax reform as part of the crisis response. An interesting (and sobering) document to read in this regard in Latvia's stand-by agreement with the IMF. Among other crisis measures, Latvia will reduce the personal income tax by 2 percentage points, from 25 to 23% (this is described on page 67).
The rationale is to leave more money in the hands of consumers, who will be weathering various hits, including a 25% cut in public wages.
As we argued in Tax Stimulus as Crisis Response, a temporary tax cut is a faster and less-prone-to-corruption measure to stave off the crisis than most fiscal expansion projects. The Latvians get this.
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It seems to me that citing Latvia’s recent personal income tax cut in this context might not be fully appropriate. The tax reform package also includes a 3% increase in the VAT, which certainly does not "leave more money in the hands of consumers" in the end. Certainly, there might be some positive effects of the labor market as a result of the personal income tax reduction.
Posted by: Andrejs | Feb 11, 2009 9:25:48 AM